Hess Midstream LP (NYSE:HESM) is a midstream player that owns major assets of Hess (HES), one of the largest oil and gas companies. Its assets are used by third parties and HES itself. This gives HESM a unique advantage in securing stable demand in the future. Since 2020, HESM has delivered solid returns and outperformed the midstream index significantly.
Some may wonder if HESM is overvalued or if its outperformance is sustainable. However, a closer look at HESM’s fundamentals reveals that there is still potential for value creation and beating the index. Additionally, HESM is attractive for dividend investors seeking income predictability and gradual distribution growth.
Three key aspects support a bullish view on HESM. Firstly, HESM is trading at reasonable levels compared to its peers in the midstream sector. The FWD EV/EBITDA of HESM is one of the lowest in the industry, indicating a notable discount relative to other companies like Energy Transfer LP and Enterprise Products Partners.
Secondly, HESM enjoys defensive cash flows due to its fee-based contracts and the majority of its revenues being secured through fixed-fee contracts with CPI escalators. This provides stability and growth opportunities. Management’s strategy to expand EBITDA generation by at least 10% annually until 2026 further supports the bullish view.
Thirdly, HESM’s capital structure is considered one of the safest in the sector, with a conservative leverage ratio and plans to reduce it even further by 2025. The company’s focus on organic CapEx projects and debt repayment contributes to strengthening its balance sheet.
Despite these strengths, there are risks to consider, such as potential delays in multiple convergence and lower demand volumes from HESM offtakers. However, the overall outlook for HESM remains positive given its resilient cash flows and defensive capital structure.
In conclusion, there is a clear discrepancy between HESM’s valuation multiples and its underlying fundamentals. With further deleveraging and EBITDA growth expected, there is a potential opportunity for investors to enter HESM before multiple convergence occurs. As such, a strong buy rating is assigned to Hess Midstream LP.
